Perfect storm pushes USDJPY through ¥100

By:
Peter Garnham
Published on:

USDJPY broke through the ¥100 level for the first time since 2009 on Thursday, a move that sparked a wave of dollar buying.

The dollar index, which tracks its progress against a basket of six leading currencies, put in its best one-day performance since late 2011, while AUDUSD broke down through 10-month lows.

The exact catalyst for the move higher in the dollar is open to debate, with some pointing to better-than-expected US jobless claims figure, which appeared to indicate that last week’s robust employment report was no fluke, and others pointing to comments from Chicago Fed president Charles Evans over the possibility of tapering the US central bank’s quantitative easing programme.

Whatever the cause, USDJPY finally broke through the ¥100 barrier at the third time of asking since the Bank of Japan (BoJ) last month announced a massive expansion of its balance sheet, aimed at boosting its economy and weakening the yen.

Clearly then, for USDJPY to break through ¥100, the market needed signs not only that Japan wanted a weaker currency, but also that the economic recovery in the US merited a stronger dollar.

Still, if there was a Japanese influence on the surge higher in USDJPY, then it could well have been investors speculating that weekly cross-border flow data from Japan would finally show that some of the wall of cash injected into the financial system by the BoJ was finding its way out of the country.

Indeed, when the figures were released later in the session, they helped USDJPY climb another leg higher through ¥101 as they showed the first evidence of capital outflows from Japan since the BoJ announced its monetary expansion plans in early April.

Admittedly the flows were pretty light given that they coincided with recent holidays in Japan, but they showed Japanese investors bought ¥514.3 billion-worth of foreign bonds in the two weeks to May 3, after ¥5.9 trillion-worth of selling in the 12 weeks before.  

 

Although the outflows were hardly spectacular, some believe it is the start of a trend, especially since the second quarter – which coincides with the start of the Japanese fiscal year – is normally one of capital outflows by institutions such as Japanese life insurers.

UBS took the opportunity to raise its USDJPY forecasts in light of the news, raising its one-month forecast to ¥102 and its three-month forecast to ¥105. Both previously stood at ¥95.

“The first concrete signs of Japanese real money outflows have at last been detected for the new fiscal year,” says Gareth Berry at UBS.

“Although Japanese real money investors still retain a conservative investment bias, we can reasonably expect a gradual increase in overseas portfolio exposure over the coming months, which should help keep the USDJPY uptrend intact.”

For his part, Derek Halpenny, head of currency strategy at Bank of Tokyo-Mitsubishi UFJ, believes the jury is still out over whether the outflows suggest a shift in the risk appetite of retail investors, a main source of pressure on the yen ahead of the financial crisis as they send funds abroad in search of yield.

“Our take is risk appetite is shifting, but only gradually,” he says.

However, Halpenny believes the positive sentiment towards the dollar should keep USDJPY supported, as signs emerge of improvement in the US economy.

Of course, the rise in USDJPY will not have escaped the notice of central bankers and governments outside of Japan.

Still, with the rise coming so soon after the support shown to Japan at the last G20 meeting of finance ministers and central bankers, where the focus was on what could be done to promote growth, the chances are that outright criticism of Tokyo’s monetary policy from its trading partners, and its effect on the yen, should not be forthcoming.

Indeed, ahead of Friday’s G7 meeting of finance ministers and central bank governors in London, George Osborne, UK chancellor, released a statement indicating that the focus of policymakers remained fixed on promoting growth, saying it was “an opportunity to consider what moremonetary activism can do to support the recovery, while ensuring medium-term inflation expectations remain anchored”.

In other words, the onus looks set to remain on central banks to support theglobal economy, implying more easing ahead.

With the Fed now the one G4 central bank where investors are speculating on a reduction in monetary accommodation, that prospect is likely to offer the dollar support. Indeed, in the minds of FX investors, the dollar could be in the process of morphing away from being a low-yielding currency.